EUR/USD: Stuck in a range, the odds of an aggressive Fed rate cut drop

  • EUR/USD is trapped in a 100-pip range since July 9.
  • Markets have priced out prospects of an aggressive Fed easing.
  • ECB is expected to send out a strong dovish signal on Thursday.
EUR/USD continues to trade a narrow range amid falling odds of an aggressive easing by the US Federal Reserve (Fed) later this month.

As of writing, the pair is mildly bid at 1.1218. The spot has been restricted largely to a 100-pip range of 1.1190-1.1290 since July 9.

The pair fell 0.5% on Friday as the difference between the yield on the US and German 10-year government bond yield rose by five basis points to 238 basis points.

The yield spread rose in a USD-positive manner, as markets scaled back expectations of a 50 basis point Fed rate cut on July 31 after the New York Fed President John Williams walked back on his dovish comments by saying his speech was not about potential policy action at the upcoming meeting.

Fed watchers had priced in the possibility of the Fed reducing rates by a half-point on Thursday following comments by Williams that the Fed should “take swift action when faced with adverse economic conditions."

With market pricing out the odds of aggressive Fed easing, the probability of the EUR/USD pair ending the range-bound trading with a break below 1.1190 appears high.

A range breakdown also looks likely as the narrative that the European Central Bank (ECB) will cut the deposit rate by 10 basis points this year and restart the quantitative easing program is becoming entrenched in the markets.

The ECB is widely expected to keep rates unchanged, but send out a strong dovish message later this week. As for today, the pair may take cues from the Bundesbank's monthly economic report and the yield differential.